DEA Recommends Rescheduling Cannabis to Schedule III

On Tuesday, April 30, the Drug Enforcement Administration (DEA) announced its recommendation to reclassify cannabis from Schedule I to Schedule III of the Controlled Substances Act, emphasizing the significance of this move within the context of federal legislation. The change has significant implications for canna-businesses, including removing cannabis operators from the scope of Section 280E of the Internal Revenue Code (280E) and easing barriers to medicinal research. This reclassification could alleviate the conflict between state laws where cannabis has been legalized and federal law, under which cannabis remains a controlled substance.

The growing trend of legalized cannabis across various states and countries, including medical and recreational uses, underscores the potential impact of the DEA’s recommendation on these legal landscapes. Under 280E, cannabis operators have only been capable of deducting costs pertaining directly to the purchase, creation, or development of inventory (Costs of Goods Sold) at the federal level. If the rescheduling is approved by the White House Office of Management and Budget after the public comment period, those same operators will experience tax relief from ordinary and necessary expenses that come with operating a business, such as costs for personnel, management, general and administrative expenses, interest, security, and rent, which should result in significantly reduced tax liabilities and thus improve cash flow.

The DEA’s announcement marks change in policy that has existed for more than four decades, during which cannabis has been classified as a Schedule I drug, a classification reserved for substances with no accepted medical use and the highest potential for abuse. The change recognizes cannabis’s already widely applied medical utility in treatments for conditions such as chronic pain, chemotherapy-induced nausea, and multiple sclerosis, reflecting the contributions of medical marijuana to its proposed reclassification and what many states have already decided including Washington D.C., that its potential for abuse is relatively low.

The “proposed rule” will be subject to review by the White House Office of Management and Budget and subsequent notice and comment rulemaking before it is finalized. The DEA’s recommendation follows a similar recommendation in August 2023 by the U.S. Department of Health and Human Services.

For more information on how the schedule change will affect industry operators, contact an advisor at HBK Cannabis Solutions at (239) 263-2111.

HBK Cannabis Solutions is a dedicated team of cannabis industry subject matter experts within HBK CPAs & Consultants, an Accounting Today Top 100 CPA firm. We were among the first accounting firms to specialize in the cannabis industry and have worked beside entrepreneurs in all industry segments—cultivators, processors, retailers—from single facility to multi-location and integrated operations. We counsel owners, management and investors in multiple states and countries, helping them with key financial activities: from planning start-ups to connecting operators with investment bankers to facilitating M&A; from pre-offering projections, state applications, and licensing to management planning and operations. Our cannabis-specific expertise is recognized throughout the industry; we regularly address industry meetings and conferences, and are active in the organizations and associations dedicated to moving the industry forward.